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(PDF) The Role of Capital Structure in Company's Financing

   

Added on  2019-12-03

13 Pages3811 Words186 Views
Poundland Group PLC-Accounts

Table of ContentsIntroduction................................................................................................................................1TASK 1......................................................................................................................................1Debt and equity......................................................................................................................1Gearing ratio..........................................................................................................................4Accounting standard..............................................................................................................5Credit crunch crisis................................................................................................................6TASK 2......................................................................................................................................6Cash flow statement...............................................................................................................6Objectives of cash flow statements.......................................................................................6Difference between cash flow and profitability....................................................................7CONCLUSION..........................................................................................................................9REFERENCES.........................................................................................................................10

INTRODUCTIONEach and every business organization prepares financial statements in order toidentify their business results. Moreover, business can take necessary decisions throughevaluating these statements. Poundland is a British Variety store chain that is headquarteredin Wilenhall. Company was established in the year 1990 that sells most of the items to stores.The firm is providing large number of branded and own label products to the stores. Itdecided a clear business growth strategy through paying focus on delivering qualifiedproducts to the customers and planned for business expansions. The long term target ofcompany is to operate over 1000 stores in United Kingdom. This report will help us inidentifying the role of debt and equity in the business capital structure. Further, reportanalyzes the importance of cash flow statement to get higher amount of profitability. TASK 1Every business organization requires collecting necessary amount of funds throughdifferent finance sources. Both debt and equity used by every enterprise to fulfil long termfinance requirements. It helps to compare the business opportunities and risk with the otherfirm that operates in the same industry. The distinction between debt and equity are explainedas under:Debt and equityBoth are external finance sources as available outside from the market. PoundlandGroup can issue equity shares in the market for collecting the funds. The cost of the sharecapital is that company has to pay return to the shareholders. Further, it is not obligatory tothe firm to provide regular return. In case of loss, it does not require to pay dividend to theshareholders. Further, shareholders are the owners of company so they have voting rights tomanage and control the business operations. Therefore, dilution of control exists in this case.Before implementing any new policy or rules, company requires to communicate with theirshareholders. On the contrary, debt capital can be obtained through bank loans and issuingdebentures. Poundland Group requires paying timely interest and instalment to theshareholders. Further, company requires keeping business assets as security towards the loans(Hovakimian, Opler and Titman, 2001). They have to fulfil many legal formalities beforecollecting funds. Further, the debenture holders and banks do not have any voting rights tothe organization. Therefore, dilution of control does not exist. Moreover, bank loans areavailable at different time periods and at reasonable interest rates. On the other hand, interestpayment is considered as an allowable expenditure for the tax purpose. Hence, it is1 | P a g e

considered as an easier source of finance in comparison to equity (Hovakimian, Hovakimianand Tehranian, 2004). Organizations do not only use the equity and debts because using onlydebts will diversify the control to business. However, if business will only use the debts thenit will lead to financial burden on company. Therefore, all the business organizations use acombination of both the sources. In context to Poundland Group Company, business is using 50486£ debts and200583£ equity in the year 2013. The amount of debt gets declined in the year 2014 to30000£ and further, equity also declined to 186475£ (Poundland Group plc Annual reportand Financial statements, 2015). However, in the year 2015, the debt is significantlydecreased to 2000£. On the contrary, the amount of equity get inclined to 226673£ whichindicates that business is collecting resources from equity capital and paid debts (PoundlandGroup plc Annual report and financial statement, 2015). The debt to equity ratio which isalso called as gearing ratio, in Poundland Group Plc, in all the three years; they are 0.26, 0.16and 0.01 respectively. All the ratios indicate that company is using greater amount of equityas compared to the total debts in its capital structure. The proportion of debt and equity inPoundland Group Plc are presented as under: Particular201320142015Debt 50486300002000Equity 200583186475226673Total capital 251069216475228673The prepared pie chart represents the debt and equity proportion in the capital structure forthe year 2013, 2014 and 2015 which are as follows:2 | P a g e

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